Aye Finance IPO priced below peers to leave upside for public investors, says CEO

Aye Finance

• Aye Finance IPO launched at Rs 1,010 crore with a lower valuation than peers
• IPO price set at Rs 122-129/share, listing on BSE and NSE on Feb 16
• Company expects credit costs to stabilize and robust growth to continue

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Aye Finance, an NBFC providing small-ticket business loans to micro, small and medium enterprises (MSMEs), is entering the market at a lower valuation compared to peers. With an IPO size of Rs 1,010 crore, the non-bank plans to use the issue to augment its capital base to meet future capital requirements arising out of growth of business and assets.

At a price to book ratio of 1.3, Aye Finance's post-money valuation comes significantly under peers SBFC Finance and Five-Star Business Finance. However, Sanjay Sharma, the CEO and founder of the non-banking financial company, explained that most investors are looking at "long-term value."

Here are some edit excerpts from the interview:

Why is Aye Finance priced under peers?

A: In our 12-year history of raising capital from private equity investors, we have never raised money at such a low valuation. Historically, the lowest price-to-book we have done is around 2.5. The rationale behind the low P/B ratio is to give public investors an attractive entry point, because ultimately the value of the company will be defined by its performance over time.

With that in mind, we felt this was a good time to enter the market, as the valuation is reasonable and offers upside. In retrospect, would I have liked to get into it at a better time? Yes. But all I'm saying is that that valuation of 1.3 is not because the portfolio is under stress or there's a big surprise coming. In fact, there's none and if anything, it is going to be a positive surprise," he added.

Why is the GNPA in the September quarter at 4.85%, higher YoY?

A: It's important to compare like with like. Our core product has a two-year tenor. If, say, five customers default over the life of the loan, that credit cost is spread over two years, which makes it look like around 3 percent annually. A player with a five-year tenor would spread the same stress over five years, making it appear closer to 1-1.2 percent.

When comparing NPAs or credit costs across products with different tenors, this distinction is critical. In Stage 3, the accumulation of all the previous ills are there. Of the 30 or 60 DPD concentration, only ~1.5 percent of the customers lie there. It's a very narrow rate.

How is the stress in the microfinance segment impacting Aye Finance?

A: Stress in the microfinance segment has had a lesser impact on Aye Finance, despite its lending to MSMEs, largely due to its diversified footprint and business-focused lending model. We also believe that the peak of over-lending is behind us.

We are present in 21 states, with almost equal branch distribution across the north, south, west and east. Even in states like Tamil Nadu and Karnataka, exposure is just 5 to 6 percent, so state-level disruptions don’t affect us meaningfully.

MFI lending is largely to self-employed or household borrowers, where loans often go into consumption. We give business loans, primarily to manufacturing and trading units, so the stress dynamics are very different.

Our credit costs have typically stayed around 4 percent, crossing 5 percent only during the pandemic and briefly last year. With over 90 percent of the loan book now new and early delinquencies low, we believe the stress is behind us and credit costs should stabilize going forward.

Why doesn't Aye Finance have a promoter group?

A: I am not a promoter, and pre-dilution I hold about 7.5 percent. In a lending or MSME-focused business, money itself is the working capital, so multiple rounds of dilution are natural. As a result, in many high-quality financial institutions, the founder or promoter ends up with a relatively small stake.

At Equitas, the founder’s stake was below 10 percent. At Ujjivan, the founder had a stake of around 1 percent. You will see this pattern across many well-run companies. A lower promoter holding does not take away from the professional commitment to the organisation.

What's the outlook for the company?

A: We believe the stress is behind us, largely because nearly 90 percent of the loan book is new. Growth remains robust, our disbursements were up about 26 percent year-on-year from September to September, which puts us on track for around 25 percent growth.

Even in a year with higher credit costs, we delivered a return on assets of 3.5 percent and a return on total assets of about 3.1 percent. In a good year, we believe the ROA can be closer to 5 or 5.5 percent, which we have demonstrated earlier, when our ROA was around 5 percent and ROTA about 4.4 percent in FY24.

While micro-enterprise customers are often perceived as higher risk, our numbers consistently tell a different story.

About the issue

The firm launched its IPO to raise Rs 1,010 crore through a fresh issue of shares worth Rs 710 crore and an offer-for-sale (OFS) of shares worth Rs 300 crore by Alpha Wave India, MAJ Invest, CapitalG, LGT Capital, and Vikram Jetley.

The IPO of the Gurugram-based non-banking finance company (NBFC) will remain open for public bidding at a price band of Rs 122-129 per share. Shares of the company are scheduled to be listed on stock exchanges BSE and NSE on February 16.

Also read: Why investors can give Aye Finance IPO a miss

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